Live blog of Bernanke’s first day of testimony before Congress

February 26, 2013, 9:32 AM ET

Federal Reserve Chairman Ben Bernanke is trekking to the Hill for the first of his two days of testimony, presenting the semi-annual monetary policy report. Washington bureau chief Steve Goldstein live-blogs the central banker’s day before the Senate Banking Committee. Click here to watch the full testimony live.

Good morning — literally and figuratively. The Dow is up 85 points Tuesday morning, after Monday’s shellacking at the hands (most think) of Italy’s stalemated election. I’m Steve Goldstein, and Greg Robb’s in the room handling the testimony of Bernanke, which is due for release at 10 a.m.

There was some news this morning in Fedland: Dennis Lockhart of the Atlanta Fed said he favors the current bond-buying approach at least until the second half of the year. Now, the fact he supports bond buying at all isn’t a surprise; the news we’re interested in is that he supports the current rate. “All things considered, I do not think that monetary policy has yet crossed the line where the benefits of the current policy — specifically the quantitative easing element — are swamped by serious concerns over problems the policy might be creating for the longer term,” Lockhart said.

We have fan mail already: ‘please Ben keep printing’ says Jon Bognaski via Twitter. I’d imagine that is not the majority view of our readers. Tweet us your thoughts to @mktweconomics , or make a comment in the section below.

Here’s the key paragraph from Bernanke’s testimony (bolding is mine, not Ben’s): “The Committee also stated that in determining the size, pace, and composition of its asset purchases, it will take appropriate account of their likely efficacy and costs. In other words, as with all of its policy decisions, the Committee continues to assess its program of asset purchases within a cost-benefit framework. In the current economic environment, the benefits of asset purchases, and of policy accommodation more generally, are clear: Monetary policy is providing important support to the recovery while keeping inflation close to the FOMC’s 2 percent objective. Notably, keeping longer-term interest rates low has helped spark recovery in the housing market and led to increased sales and production of automobiles and other durable goods. By raising employment and household wealth–for example, through higher home prices–these developments have in turn supported consumer sentiment and spending. “

Treasury yields are pretty steady today. On the one hand, if yields rise, that’s a sign the economy is improving (yay!). On the other hand, if yields fall, that will make it easier for consumers and companies to borrow (yay!). That’s why Harry Truman famously asked for a one-handed economist.

Just picking over Bernanke testimony, I found this paragraph interesting:”..it is highly likely that average annual remittances over the period affected by the Federal Reserve’s purchases will remain higher than the pre-crisis norm, perhaps substantially so. Moreover, to the extent that monetary policy promotes growth and job creation, the resulting reduction in the federal deficit would dwarf any variation in the Federal Reserve’s remittances to the Treasury.” So Bernanke’s worst-case scenario isn’t (explicitly) losses, it is just low profits to send to the Treasury.

Bernanke is talking right now about the need to avert the sequester. “A significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March 1, which, according to the CBO’s estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year. Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant. Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.”

Market update: Dow’s only up 60 now. Are they reacting to Boehner’s plea for the Senate to ‘get off its’ you-know-what? Some more bad news out of Italy? Or are they unconvinced of Bernanke’s dovishness?

Bernanke citing CBO numbers, again, on sequester impact on growth. I would like Fed model’s numbers, but there you go. Says he thinks more gradual short-term cuts and bigger long-term cuts would be in order.

Banking regulation question, on ‘QRM’ vs ‘QM’ — has to do with what kind of mortgages bank can make while getting some measure of legal protection. Agencies may make QRM identical to QM, Bernanke says.

Bernanke asked what is the most important step Fed has taken to boost employment. Bernanke giving rote answer on benefits of QE, but not really giving a direct answer. Interesting though he also mentioned policies have reduced risk of deflation.

The risks from Europe’s continued lack of growth are mostly financial, Bernanke says. Financial stresses less now than over two years. The Fed has ‘noticed’ U.S. firms struggling to export to Europe. Translation: Europe, don’t blow up on us, that’s all we ask, we have learned to live with you not doing a darn thing to help global growth.

Bernanke just endorsed Japanese Prime Minister Abe. “I think they should try to get rid of deflation,” he said, after a give and take with Sen. Shelby on central bank balance sheet size.

Probably could write a whole book about Bernanke and Japan. He famously scolded Japan before becoming Fed chairman about not doing enough to fight deflation, and then has got some of that thrown back in his face over U.S. monetary policy.

Bernanke talking down benefit of stock prices from QE, which it should be pointed out, hasn’t always been his mantra. He says point of QE is to boost economy, which then helps profits, which then helps markets.

Some more outside reaction. Steve Stanley of Pierpont Securities says Bernanke ‘smugly’ dismisses risks from QE. Says Stanley: “This is the Oz approach: close your eyes, click your heels three times and repeat after me “I have the tools to exit, I have the tools to exit…” This is going to end very poorly, but the Fed is not going to worry about that until it is actually time to exit.”

Paul Ashworth of Capital Economics says Bernanke actually has given a fair amount of ammunition to the hawks, by simply discussing in detail the risks from QE. “Overall, even if he still believes that the benefits are greater than the costs, the time Bernanke devoted to running through those costs in his testimony illustrates how the debate within the FOMC is changing,” Ashworth says.

Bernanke replies, when it comes time to exit, “we will sell slowly with lots of notice,” and also, that the Fed has ability not to sell at all and just let bonds mature. Of course, average duration of Fed’s portfolio would make latter option difficult to achieve if the economy actually does start accelerating.

Diminishing return on QE? Bernanke: “It’s a good question,” he says. He does point out while market impact seems less, banks willing now to lend more, so more can take advantage of low rates. Bernanke is taking credit for housing improvement and car loan sales.

What’s holding up the Volcker Rule, which will prohibit banks from speculative trading? “The issues at this point are not the work we have done at the Federal Reserve, it’s finding agreement and closure of different agencies working on the rule,” Bernanke replies.

Got a giggle from Bernanke when asked if Senate will ever pass a budget. And then asked by Sen. Heller about passing a balanced budget in his lifetime. “I would settle for [debt-to-GDP] stabilization,” Bernanke replies.

Warren asks about the $83 billion benefit big banks get as implicit subsidy. “Those expectations are incorrect,” Bernanke says in reply. Translation: big banks should not have to pay for subsidy if market subsidy is basically wrong.

Bernanke asked, what is the total national debt of the GDP? About $11 trillion Bernanke replies. Sen. Manchin keeps asking about all guarantees, which the senator puts at $30 trillion. Bernanke says it’s unlikely the government would ever have to pay back all those potential obligations.